CalPers Cuts Return Expectations to 7.5%

By Michael Aneiro

When one of the biggest institutional investors in the world cuts a long-held assumption about how much it thinks its investments can earn in a year, it doesn’t bode well for the rest of us.

The California Public Employees’ Retirement System, or CalPers, has lowered its discount rate, which represents the fund’s assumed rate of return, to 7.5% from 7.75%. Although the rate is just a target, it’s important because it’s used to calculate the present value of future pension-payout liabilities, and lowering the rate means CalPers will likely have to ramp up annual contributions to meet its future goals.

“We understand the impact this will have on our employers in meeting contribution requirements,” said Rob Feckner, CalPers board president, in a statement. “However, current economic conditions impelled us to make this change now, and our actuaries will continue to evaluate the discount rate in the coming years.”

The rate is especially significant because it’s seen as a possible bellwether for other large retirement systems and pension funds. CalPers last changed its discount rate a decade ago when it was lowered to 7.75 percent from 8.25 percent.

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There are 4 comments

MARCH 15, 2012 12:42 P.M.

Ernest wrote:

Not only is it overdue, it's still wildly optimistic. The state of CA has written a blank check to its employees. The only question that remains is how many of us are going to move.

MARCH 15, 2012 1:46 P.M.

bud u. wrote:

How realistic is 7.5% in a market like this where 10 year treasuries pay a meager 2%? Calpers and all other govt. pension plans need to get real and lower their targets to 3.5% to compete with 30 year treasuries. Don't forget what happened to the equity markets just a few years ago. Raising taxes to pay govt employee benefits is D.O.A. in this world.

MARCH 16, 2012 1:31 P.M.

Al Moncrief wrote:

THE COLORADO WE LIVE IN.
Fact #1: Governor Hickenlooper signs bill this week to give a raise to state legislators. Fact #2: State legislators steal contracted, earned, fully-vested, and accrued retirement benefits from elderly in our state (SB 10-001, COLA theft bill.)
Our values are warped.
Thank God the courts are beginning to correct the outright, unabashed theft of public pension benefits that has occurred in a number of states across the U.S. Read below the clarity that this Florida judge brings to the matter, it is truly breathtaking.
COLA LAWSUIT VICTORY IN FLORIDA! – FLORIDA JUDGE: IT’S ILLEGAL TO TAKE EVEN FUTURE COLA ACCRUALS FROM EMPLOYEES, LET ALONE COLA BENEFITS THAT HAVE ALREADY BEEN EARNED AND ACCRUED (SEE: COLORADO GENERAL ASSEMBLY, SB1.)
The Florida Legislature attempted pension reforms that were not nearly as aggressive, in terms of risk of unconstitutionality, as those adopted by the Colorado General Assembly. Nevertheless, the Florida Legislature has been smacked down by the courts.
Here are some noteworthy portions of the Florida ruling:
“This court cannot set aside its constitutional obligations because a budget crisis exists in the state of Florida. To do so would be in direct contravention of this court’s oath to follow the law.”
“To find otherwise would mean that a contract with our state government has no meaning.”
“There was certainly a lawful means by which they could have achieved the same result.”
“Florida law is clear that a legislature can, as part of its power to contract, authorize a contract that grants vested rights which a future legislature cannot impair.”
“The elimination of the future COLA adjustment alone will result in a 4 to 24% reduction in the plaintiffs total retirement income. These costs are substantial as a matter of law.”
“Where the state violates its own contract, complete deference to a legislative assessment of reasonableness and necessity is not appropriate because the state’s self-interest is at stake.”
“All indications are that the Florida Legislature chose to effectuate the challenged provisions of SB 2100 in order to make funds available for other purposes.”
“If a state could reduce its financial obligations whenever it wanted to spend the money for what it regarded as an important public purpose, the Contract Clause would provide no protection at all.”
“The Takings Clause is intended to prevent the government from forcing some people alone to bear public burdens, which in all fairness and justice should be borne by the public as a whole.”
“Defendants are further ordered to reimburse with interest the funds deducted or withheld . . . from the compensation or cost-of-living adjustments of employees who were members of the FRS prior to July 1, 2011.”
Here’s a link to the decision in Florida:http://judicial.clerk.leon.fl.us/image_orders.asp?caseid=49809133&jiscaseid=&defseq=&chargeseq=&dktid=87117441&dktsource=CRTV
Here’s hoping that one day Justus will prevail in Colorado. Read all about it and support the lawsuit at saveperacola.com.

MARCH 16, 2012 5:26 P.M.

FrankieB wrote:

Stocks are good for 8% returns at most, and bonds maybe 4%, so I think 6% is a fair return assumption. 7.5% is still too aggressive. CALPERS is a political organization which is trying to save the California Democratic Party from a credit downgrade.

As for Al's comments, I have a problem with retroactively changing contracts including pension deals, unless it was something snuck into a bill in the dead of night or something not the result of an arms-length transaction.